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Size matters less than gold miners think

Fri, Jan 18, 2019 - 8:48 AM

[SINGAPORE] Size matters less than gold miners think. Newmont Mining's US$10 billion purchase of rival Goldcorp creates a behemoth: the world's largest producer of the yellow metal. The US miner talks up the benefit of growth options, promising steady production and dividends. But investors aren't buying it.

The gold sector, still relatively fragmented, has been driven to consolidate. Companies are facing faltering production and flatlining costs. Investor interest has faded with the advent of exchange-traded funds and disastrous boom-year deals that culminated with Barrick Gold's acquisition of Equinox Minerals in 2011, the year the metal peaked, later largely written off.

Newmont's move on Monday, less than four months after Barrick's acquisition of Randgold, secures battered Goldcorp at a significant discount to its net asset value, unlike where the sector generally trades. The target's shareholders get a management team with a track record of turnarounds, which might narrow the valuation gap. Newmont gets a better production profile overall with a wider range of projects.

Scale is all very well. But cost synergies are generally poor in mining, given operations are distant and differ: Newmont/Goldcorp promises a paltry annual US$100 million before tax. A rare exception would have been Newmont's proposed 2014 merger with Barrick, thanks to proximate Nevada operations. But that didn't happen.

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Hence investors have wiped almost US$2 billion from Newmont's market value since the deal was announced. Even though tying up with Goldcorp enhances net asset value per share, paying a 17 per cent premium means Newmont is offering its shareholders 3 per cent less than what they had on Friday, even including synergies. By contrast Barrick and Randgold was nominally a nil-premium merger.

As such, the buying team will have to squeeze more out of Goldcorp's assets than the synergies already imply. But bigger operations mean more stretched managers – even large diversified players like BHP have reduced the number of projects they run. The combined group's chief executive-in-waiting Tom Palmer has impressive operational credentials but unlike geologist Mark Bristow who now runs Barrick, no experience as chief executive.

Further details due next month are an opportunity to show focus, perhaps with details on the US$1 billion to US$1.5 billion in planned asset sales, which could conceivably include even Newmont's Ghana mines, now an outlier. Players like Australia's Newcrest, keen to diversify their asset base, will be circling. But any other gold groups pondering tie-ups will look at Newmont's experience and put them on hold.

Newmont announced on Jan 14 that it would buy smaller rival Goldcorp for US$10 billion, mostly in shares, creating the world's biggest gold producer.

The acquisition follows Barrick Gold's agreement in September to buy Africa-focused producer Randgold. The new company would overtake current leader Barrick's annual production.

Newmont Chief Executive Gary Goldberg will retire at the end of 2019, when Tom Palmer, Newmont's chief operating officer, will take over at the helm of the combined group.

Newmont expects annual, pre-tax savings of up to $100 million.

Newmont shares have dropped some 10 percent from their closing price on Friday, before the deal was announced. Goldcorp shares are up around 6 percent.